Behavioral economics at Starbucks

May 18, 2012

Starbucks generates 4 billion paper cups a year. Yikes! That’s about 12 cups for every man, woman and child in America. The company has been working hard, with an array of partners, to build a system to enable these cups to be recycled.

Meantime, though, there’s a way to reduce some of that waste: Charge customers 10 cents for every paper cup they use.

As it happens, the company already does just that. It just doesn’t do it in an effective way. The result is that Starbucks is missing a big opportunity to have a lighter environmental footprint.

Let me explain. Starbucks now offers its customers 10 cents off the price of any beverage if they bring their own mug. It doesn’t make a big deal out of this but the information is available on its website on a page headlined Make A Difference. It says:

Join the movement. Bring a reusable travel mug and get a 10 cent discount on any Starbucks beverage, anytime.

One person can save trees, together we can save forests

Which sounds great. Except that if Starbucks really wanted to save trees, it wouldn’t offer discounts to people who bring mugs. It would charge a dime to everyone who does not.

Notice, I’m not suggesting that Starbucks change its prices. I’m only recommending that the company change the way it talks about its prices.

Right now, if a tall coffee has a list price of $1.60, the company will sell it to me for $1.50 if I bring my mug.

Instead, it should set the price at $1.50 and charge 10 cents extra for the paper cup.

Same prices. Big difference.

If you’ve read Thinking Fast and Slow by Daniel Kahneman or Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard Thaler and Cass Sunstein — a pair of marvelous books about behavioral economics, which explain, among other things, how our biases can shape the choices we make — you’d understand why. People tend to work harder to avoid losses (the 10-cent charge for a paper cup) than they do to pursue gains (the 10 cent discount for bringing your mug).

To test my theory, I reached out to Amy Krosch, my favorite student of behavioral economics. Amy is a doctoral candidate in social psychology at NYU and formerly an associate director at the Center for Decision Sciences at Columbia. [Disclosure: Amy will marry my daughter Sarah next month!] Amy told me by email:

I think your intuition is totally correct – making the default $1.50 and requiring people an extra 10 cents for a to go cup should be more useful in encouraging people to bring their own cups. The 10 cent savings probably only appeals to people who would already have brought a cup anyway.

There are probably several processes at work in such a strategy, but the strongest are likely loss aversion and social norms.

Loss aversion suggests that peoples’ subjective value of 10 cents is greater when it is being taken out of their pocket than being added to it. Kahneman & Tversky’s Prospect Theory suggests “losses loom larger” – that is, losses hurt more than gains feel good. On the flip side, it has been shown that when the amounts are small, gains actually “loom larger” than losses. However, in the cup situation, people who buy coffee daily or multiple times a day would likely see the loss in terms of money spent over time and your manipulation would probably be more effective for them.

Overlooked by the behavioral econ theory is the strong influence of social norms. The social norm to do the “green thing” is likely incredibly powerful in such situations (as anyone shamed at the grocery store for forgetting their reusable bags knows; portrayed for comedic affect in Portlandia. If everyone in line at the Starbuck’s has a reusable cup, you’re going to feel bad if you didn’t bring one.

The combination of those two things should be pretty effective: If bringing your own cup is the default and the price increases if you don’t, and not bringing one causes you social shame – you’re going to remember your reusable cup!

This approach works, as we know, with taxes on plastic bags. So the question is, why won’t Starbucks do this? I’m afraid the answer is that because the company knows it will work.

Branded trash

I moderated a panel about food packaging yesterday with Jim Hanna, director of environmental impact for Starbucks, at Cooking for Solutions, a great conference about food and sustainability run by the Monterey Bay Aquarium. I asked him why the company didn’t replace its small discount for mugs with a small charge for cups, without changing the actual prices. After all, the company doesn’t like to see images like this, which some call “branded trash.”

Jim told me (and I’m paraphrasing here) that Starbucks wanted to protect its relationships of trust with its customers, and it didn’t want to “penalize” them for not bringing a mug. Some customers also might misinterpret a 10-cent charge for cup as a price increase, even if the coffee price dropped at the same time.

“It comes down to the relationship that we’ve built with our customers over the past 40 years,” Jim said. The company does not want to suggest to its customers that there’s something wrong with their daily habit of drinking a beverage in a disposable paper cup–even though there is, kinda, sorta, something wrong.

I write this not because I’m cynical about Starbucks but because I admire the company. It’s been a leader around issues of social and environmental responsibility. [See my recent blogpost, At Starbucks and Thanksgiving Coffee, it’s not just a cuppa joe.] But I can’t understand why Starbucks won’t at least test out this new way of talking about prices, and see how customers react.

Comments

I think Starbuck’s position does make some sense from the point of view of behavioral economics. I think the 10 cent surcharge is going to be perceived as a price increase, maybe worse than a price increase. It might be seen as taking something back that was yours (the right to a free cup) and asking you to buy it back. That is going to produce a negative “halo effect.” It could literally make the coffee taste worse.

Starbucks needs to give the right nudge, but still look like it is doing the customer a favor when it gives them a chance to opt out of the paper cup.

What I think they have to do is keep it a discount, but somehow frame it so that not taking the paper cup is the norm. One simple way to do that would be to instruct clerks to ask, at the time of order, “Will you be taking the 10 cent discount for your own cup today?” In order to get the paper cup, the customer then has to say “No,” which implants in the idea that the customer is doing something negative and abnormal by taking the paper cup.

I do agree Starbucks should try out some strategies, including mine and the surcharge and the discount to see what happens.

Thanks, Ed, you may be right that a 10-cent charge for a paper cup might be perceived as a price increase even if it is not.
Your idea is a creative one–although I suspect that anything that slows down service might be frowned upon at what is essentially a fast food restaurant (not that Starbucks wants to be perceived that way).

For the average person to notice you’d have to explicitly tell her that she is paying .10 more because she didn’t bring a cup. Otherwise — what’s ten cents? “Did the sales tax go up? Did the cost of coffee beans go up? Whatever, who cares, give me my coffee.”

I find it hard to imagine Starbucks building a multi-million dollar marketing effort around a (however well-meaning) price increase.

Actually, this discussion, while interesting, is pretty trivial. The paper cup thing is a PR stunt, not a climate policy. In the context of Starbucks’ environmental impact, the difference between a paper cup and a ceramic mug is trivial, if in fact the mugs are actually better. The energy involved in firing ceramic cups and the water and soap it takes to wash them may wind up being worse. I would guess it depends on how many times each mug is used, what happens when it is disposed of, and the content and process of making the paper cups.

Interesting! I like the thought process here…I’m in San Jose, CA. the land of the banned-plastic bags. While I totally agree, plastic bags are horrible for my globe, so is the mass production of reusable bags with their dyes and fabric processing, much of which is done over-seas where they burn dirty coal…It’s not a win-win. Same with the cup-mug debate, I think.

Marc,
I think you’re on to something, but agree with Ed that the approach is not quite right from a business perspective. I’d suggest test marketing both Ed and Marc’s ideas and throw in a suggestion for a headline across the top of their menus which described the offer. They could also gain positive PR by building a marketing campaign around the program. How about a half price campaign for a week, for those who bring in their own cup? Baristas could be trained to educate customers on the existing program and the positive environmental impact that customers could have with their actions. Bring your own mug coupons would also seem a worthy offering. Who doesn’t like having the opportunity to save money, while doing the right thing?
Starbucks has two separate issues. They lack awareness, and they’re not triggering the right behaviors. If they take care of the awareness piece, they’ll likely still have the behavior problem. This is akin to the reusable shopping bag dilemma. You realize you don’t have the bags in the car when you get to the store. Given this, it might be best to run an ad campaign around the idea of keeping a cup in your car for the environment’s sake.

How does paying an extra 10 cents to Starbucks as a “paper cup penalty” help “save trees”? It merely adds more money to their revenues and covers business expenses for things like paper cups. It is nothing more than a nice touch to knock some off the price when a customer brings in a reusable cup. Everybody feels the warm and fuzzies about “saving the environment” and Starbucks gets some kudos.

What are the health implications of bringing in filthy mugs that may have been rolling around in filthy cars? And is Starbucks somehow liable if filthy mug does not have a proper lid or the handle is not secured to the cup and the customer spells coffee all over herself a la infamous McDonald’s personal injury lawsuit?

Where does the concept of bring your own mug end? Do we now bring our own forks, knives, spoons, bowls and plates into eating establishments? Don’t forget napkins. Cloth ones, please. If I am going to the trouble of keeping a clean, properly lidded mug in the car, I may as well swap it for a thermos full of coffee I have made ahead of time in my own kitchen.

Gino, when my local Transition Town has a pot luck we all bring our own non-disposable utensils. When our Green Cities Coalition has a happy hour, many of us bring our own non-disposable cups. There are thousands of people who don’t mind making this extra effort. We choose a minor inconvenience of bringing our own mug over the major inconvenience of killing our planet.

Dean, I definitely like the coffee shops that offer their coffee in real mugs rather than what will soon be trash. That’s a perfect example of externalities. It’s cheaper for Starbucks to clog public landfills than for it to put porcelain mugs and dishwashing stations in every store.

I have a great deal of respect for the efforts of Starbucks as a leading socially responsible company. There’s still room for improvement, though, especially on nudging customers to share the responsibility and reduce their impacts. AS outlined in it’s recent CSR report, Starbucks significantly reduced it’s targets for beverages served in personal tumblers and shifted its focus to recycling cups, which is easier for the company and its associates who don’t have to do anything different at the store. Behavior change is hard, however, associates are very well trained and almost always ask if you’d like a print copy of the receipt and only print it if you say yes.

Having worked on sustainability programs for a major Canadian retailer, I can say that the hardest but most important part to success in customer-facing initiatives is employee engagement. From my vantage point, Starbucks associates haven’t been fully enrolled in a compelling shared vision where they share responsibility for reducing waste at stores and actively help customers shift away from single-use cups towards ceramic/glass mugs and reusable personal tumblers.

In most neighborhood coffee shops, Starbucks or independent, many customers do sit and enjoy their beverages. In many Starbucks locations, it would make sense for cashiers to actually ask customers the following: “will that be to go OR for here”? (Alternatively: “are you going to have that for here”?).

For people who state up front that they’ll be sitting and enjoying their drink in the store, the new default should be to serve them in a ceramic mug or glass, depending on their beverage. The bonus would be to offer them a $.10 discount stating that out loud to the customer as a form of praise which other customers in line will hear. Customers should also be praised by cashiers for bringing in their own reusable mugs.

I wonder if the solution lies outside the pricing arena, and perhaps outside the direct control of Starbucks. I’ve read just finished reading Nudge and am excited about the possibilities of social norms — the “everyone’s doing it thing.” Maybe Starbucks could enlist the support of a third party — an environmental group, Net Impact, college environmental majors, e.g., — to all start bringing reusable mugs to Starbucks, creating the impression that well, everyone’s doing it.

Jacquie, IMHO this is the way to go. In fact, the organization I work with (Port of Portland) did just that by offering an excellent incentive program to encourage durable mug use by employees who frequented coffee vendors (including Starbucks) in the Portland Int’l Airport (the Port’s Offices are adjacent to the PDX Terminal). The use of durable cups among Port employees went up, and there has been a noticeable cultural shift towards mug usage (and against disposable cups).
[Disclosure: The Port of Portland is one of in Starbucks’ partners in the quest for a recyclable cup]

Jacquie’s suggestion has some appeal, and–with a well orchestrated campaign–it may actually result in a percentage of Starbucks customers actually bringing their own mugs. But I am doubtful that this could become a mainstream trend, for the simple reason that many consumers will not consider it convenient to go around with a mug in their bag (see Gino’s comment).

Earlier, Michael made a valid point about praising customers for making the right choice. With the risk that some customers will perceive the $.10 surcharge for not using a mug as a penalty, a positive reinforcement signal from the cashier could help to reduce that risk — and turn the penalty into a reward.

7-Eleven does something similar with their fountain drinks. You used to have to buy a branded cup that they’d refill at a lower price. Now they’ll refill any cup at the lower price. I used to drive a lot for work, and stop by 7-Eleven several times a day. I could have brought an old cup along, but there was something about getting a fresh cup each morning.

The problem with negative pricing it that it also leaves a negative impression of the brand. Particulary when you are dealing with a premium positioned product.

To see this, look in Sweden or Norway for example where typically the grocery stores charge customers about 30or 40 cents for each plastic bag they use. The overall impression is not that the store is environmentally friendly but rather that they are nickel and diming.

This is because the customer has no way of judging the relationship of the price charged to the cost/impact of the plastic bag. And because often they have already paid a lot in the shopping transaction, so this extra bit seems cheesy.

And thats in everyday grocery stores.

Now match that up against a premium coffee brand. Yes, you want to do good. No, you are not going to Starbucks because you wanted a Ryaniar, nickel and diming experience. Bad match for the brand. Really bad match.

Much better if Starbucks engages to work with interested customers who do want to do good (the discount), rather than making ALL customers feel negative.

This is one of those ideas floated by environmental evangelists, but is really not compatible with all brand positions, since many of them have to deal with customers who are really not appropriate for the evangelical/”you’ll burn in hell if you dont” approach to change

I second the comment about it starting with barrista. Paper cups are their default position. As a Starbucks customer I need to practically SHOUT that I WANT IT IN A MUG. I have ordered frappacino’s where they measure it in a plastic cup, pour it in the blender, and then pour it in a glass – in effect, doubling the waste.
If starbucks wants to decrease their paper/plastic waste, they need to design their products to not require them for measurements, etc.
also this price differential does not account for them providing a ceramic mug. Who covers that cost?

Not sure if you proposed this to Starbucks directly or not, but I mentioned this to their sustainability people about two years ago.. and it bounced right off. Took me 5 minutes to explain that in real terms the pricing was NO DIFFERENT than their current scheme, even though this minor change would do exactly as you say. It would encourage to see the cost of the cup as a penalty vs. the savings as a reward… and I would have loved to have seen a pilot program to see the impact.

Until then.. let’s continue to share their planet. Where paper cups are free, and there is an “away”

One problem with Starbucks program is that no one knows about the 10 cent discount. Is this on purpose? There are no signs in the store, at least at mine on Capitol Hill, a block from Congress, where all the influencers hang out.

I only learned about the program at the conference Marc referenced and so today I showed up at Starbucks with my cup in hand and I got my 10 cent discount. As I was pouring milk into the coffee, another customer said, “Wow, nice cup.” “Thanks,” I replied, “You know they give you a discount if you bring your own mug.” “Really?” he said, “I’ll remember that.”

And he’ll have to because Starbucks won’t tell you that with any apparent signage in the store. On the other hand, if they did at least test the penalty solution, people would get the message pretty quickly.

we have single stream recycling here and Starbucks does not participate. All their cups go to the landfill.

It is also interesting that everything at Starbucks is a luxury. None of it is needed. One could also argue that the high level of sugar and the caffeine in their drinks is a public health hazard and causing obesity, rising health costs, etc. Don’t get me wrong I do stop for a drink occasionally, but I always think of the order of the mantra to reduce, reuse, and recycle. Reducing use of these luxury items would be the biggest step anyone could take, especially when Starbucks is not taking steps themselves to recycle or encourage reuse!!!!!

Trackbacks

[…] Behavioural economics at Starbucks – Marc Gunther suggest replacing the 10c discount for using a re-usable mug to a 10c surcharge for using a paper cup (and reducing the cost of coffee by 10c to compensate for the price increase) as a way to save more trees. The behavioural economics dynamic here is Loss Aversion, and Marc couples this with the power of ‘Social Norms’. Almost as proof of this logic, Starbuck pass up this suggestion for the inverse reason – it doesn’t want to nudge its valued customers to hard (even if this is in the same direction as its environmental responsibility objectives). […]